Tropentag, October 11 - 13, 2006 in Bonn "Prosperity and Poverty in a Globalized World – Challenges for Agricultural Research"

Micro-financing Institutions in Less Developed Countries: Conditions When Appropriate Changes from Informal to Formal Institutions

Czech University of Agriculture Prague, Engineering, Economics and Rural Development in the Tropics and Subtropics, Czech Republic

Abstract

The year 2005 was declared by the UN General Assembly as the international year of micro-credit. This fact emphasises the significance of micro-finance in the collective effort of the world community to reach the Millennium Development Goals accepted by the United Nations. Micro-finance activities constantly help to reduce poverty and increase the income of the population. Micro-finances are one of the important factors influencing the reduction of public debt of Less Developed Countries.

The study characterises the evolution of indebtedness from the macroeconomic viewpoint and micro-finance activities. One of the main questions is when and under which conditions it is acceptable to accelerate the transformation of informal micro-financial institutions into formal institutions. In conclusion the fundamental prerequisites and general conditions for this transformation are defined.

The moment for the transformation of informal micro-financial institutions into formal institutions comes when institutions meet three requirements, so-called triangles:

1. Maintenance of the environmental stability in which they operate (critical triangle)
· sustainable environment
· necessity to prevent hunger
· need to reduce hunger in region

2. External sustainable development of financial institutions – external stability of institutions (triangle from Professor Keller)
· financial stability, which secures the sustainable development of institutions
· must have sufficient size and quality (stand up to the competition, to broaden provided services and improve their quality)
· must have an effective impact on increasing economic stability and prosperity of clients

3. Internal economic sustainable development of financial institutions – internal stability of institutions (international triangle of economic stability)
· profitability – management, where returns exceed costs and micro-financial institutions (MFIs) achieve profit
· liquidity – an ability to pay clients on request of their deposits (MFIs do not deal with their own financial resources and together generate cashless financial transactions)
· solvency – an ability to pay from one's own ordinary income (or by conversion of property) ordinary costs and obligations in case of losses.

Keywords: Hunger reduction, indebtness, less developed countries, micro-financing, micro-financing institutions

Contact Address: Karel Srnec, Czech University of Agriculture Prague, Engineering, Economics and Rural Development in the Tropics and Subtropics, Kamýcká 129, 16521 Prague 6 - Suchdol, Prague, Czech Republic, e-mail: srnecitsz.czu.cz